How to fix the American drug industry

In America, medication is extremely expensive — and it's getting worse. Stories of Wall Street bloodsuckers snatching up the patent on some lifesaving drug and jacking up the price by many thousands of percent are routine, and reflect a broad-based increase in the price of drugs in general.

But it's not just prices. The American drug system has also become sclerotic and corrupted, almost entirely geared to the commercial needs of pharmaceutical companies.

In the British Medical Journal, Dr. Adam Gaffney, Joel Lexchin, and a working group of pharmaceutical policy experts published a smart plan on Thursday to address the problem, both here and in Canada — endorsed by Physicians for a National Health Program and the National Nurses' Union. The paper gives a good sense of the level of root-and-branch reform that will be required to create a medication system that actually functions on behalf of the citizenry.

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Let me start with the first and most obvious problem: cost. U.S. spending on outpatient drugs is a whopping $1,026 per person annually. The OECD average, meanwhile, is $515, while Denmark's is a piddling $240. That creates in the first instance a gigantic cost barrier for uninsured and underinsured people.

Now, defenders of the pharmaceutical industry would argue that soaking the American (or Canadian) drug customer is necessary to fund research and development, but this is simply not the case. For one thing, 10 companies that recently developed cancer drugs spent $9 billion on R&D, and raked in $67 billion in monopoly profits as a result, reflecting the fact that what high prices are mainly producing is high profits — 23 percent versus 7 percent among Fortune 500 firms.

For another, previous spectacular medical breakthroughs have relied more on moral motives than pecuniary ones. The polio vaccine, for instance, was developed with a foundation grant and deliberately not patented so it could be distributed far and wide as cheaply as possible.

In fact, to the extent that the U.S. patent system incentivizes research at all, it's often at odds with medical needs. Consider antibiotics: These drugs are a foundation stone of the entire edifice of modern medicine, arguably the most important class of drugs of all. Without them, there would be no transplants, most major surgery would be impossible, and people would once more routinely die of infections. Worse, what antibiotics we do have are steadily being made obsolete by evolution, with drug-resistant strains cropping up routinely. But there is little profit in making a new antibiotic. That's because medical providers would try to use the drug as little as possible to prevent resistance from developing. Instead, they would only give it out when every other antibiotic had failed, and then for as short a time as possible. No big profits there, even at obscene markups.

In short, there is no reason not to smash down drug prices. The authors of the British Medical Journal plan would do this with a multifaceted strategy.

First, they would set up in the U.S. a single-payer insurance system, which would create a formulary of all medically necessary drugs that are covered for free. But that won't be enough. Canada has a single-payer system as well, and it is still being pretty badly ripped off compared to Denmark — spending $713 per person annually.

So, second, the authors would start nationwide drug negotiations through their new national insurance system (which, being virtually the only drug purchaser, would give it a power close to national price controls).

Third, they would reform the patent system so that if holders still insisted on price gouging, they could be forced to license their patent to a generic manufacturer. And if that didn't work, drugs could be manufactured by public agencies.

However, under this system, there would still be a need for an upgraded drug development pipeline. The authors would create one by massively increasing funding for agencies like the National Institutes of Health, which would issue grants to promising new drug ideas that, if created, would naturally be public domain. There are plenty of budding Jonas Salk-type scientists out there who would gladly work for a decent salary and the public good, and perhaps some national prestige.

Then the authors would reform the drug approval process, which is both cumbersome and heavily influenced by pharmaceutical companies. Oversight agencies like the Food and Drug Administration would be fully funded by tax money, not fees on the companies they oversee; evaluation panels would not be allowed to have anyone with a financial conflict of interest; expedited processes would be restricted to drugs promising genuine clinical advances, not "me too" variations on existing treatments; and exclusive patents would be granted only to superior medicines, not simple equals. After going to market, followup surveillance studies double-checking initial results would be mandated and rigorously enforced.

Finally, the authors would drastically scale back drug companies' marketing efforts. Misleading or "off-label" (that is, not clinically approved) promotions to doctors would be banned, and enforcement penalties sharply stiffened. Direct-to-consumer advertising is even worse, and frankly a moral atrocity, which is why it is banned in every country except the U.S. and New Zealand. While it would probably be considered unconstitutional to simply ban it outright, sharp restrictions on the rampant vague, exaggerated, or misleading claims in such ads would be a great stopgap measure.

Like the rest of the U.S. medical system, American prescription drug policy is a nightmare of complexity and waste. The good news is that we are already spending far more than necessary to provide equal access to all lifesaving medicines to everyone in the country. It's just a matter of beating that spending into a structure that provides for every American.